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Mexico seeking private natural gas partners

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Mexico seeking private natural gas partners

By Chris Dalby

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Mexico’s Energy Reform has worked out well for international companies so far…

In March, Eni became the first international company to drill a well in the shallow waters of the Gulf of Mexico, at the Amoca oilfield. In June, it followed this up by winning three new exploration and production fields in the southeast of the Gulf during Round 2 of the Reform.
While these are strong accomplishments, the Mexican government is now urgently seeking international private companies to partner up with in order to develop more sustainable opportunities. The Energy Reform has been ambitious but has left the government needing help in key areas, including natural gas, which the country is betting on heavily as a transition fuel.
In June, Mexico’s electric utility, CFE, liberalized natural gas prices hoping to see a glut of private sector competition to enter the sector. This is in response to a worrying trade imbalance with the U.S. In March, Mexico’s natural gas production fell to 3.2 bcf/d, 14 percent down from March 2016. In 2017, at one point, only one onshore rig was active, marking a severe decline. This has left it sorely dependent on U.S. imports, which stood at 4.1 bcf/d in April but this could explode as more pipelines are laid down.
This is why Mexico is counting on private sector partners to rectify this deficit. By freeing up natural gas prices, opening up more onshore areas, and tapping into reserves near the border, the Mexican government is doing all it can to find partners, as it has for offshore oil, to revive its energy transition goals.
There have been some clear success stories, to date. Foreign players have already begun providing natural gas to Mexican customers. As of September 2017, BP was delivering around 200,000 MMBtu (million British thermal units) of natural gas a day across eight Mexican states from Nuevo Leon at the U.S. border to the State of Mexico, surrounding the capital.
Now, at the current stage, its clients remain in the corporate domain, as it has the right to sell to industrial users, local distribution companies and independent power producers. While opening up the residential sector is a big challenge that is yet to be addressed, seeing the formerly protectionist Mexico allowing a supermajor like BP to distribute natural gas across the country is a major step.
BP has even gone a step further, having won an auction to secure pipeline transportation rights, and signing an agreement with Mexico’s gas regulator, CENAGAS, to bundle services linked to the delivery of natural gas.
“We intend to continue to grow our Mexican customer base and be a reliable supplier of natural gas into the country for many years to come.” said Orlando Alvarez, CEO of BP Energy Company, BP’s North America energy marketing and trading group.

While oil exploration in the Gulf of Mexico has been the big target of the Energy Reform overall, the role of natural gas as a transition fuel should make for strong growth

The speed at which auctions are being rolled out in the oil and gas sector shows the space there is for private companies to enter the Mexican natural gas market at every stage of the production chain.
Earlier this year, the government carried out its first auction for private companies to take over the operation of pipelines, especially on the all-important route to the U.S. twenty four national and foreign companies competed and the winners read like a who’s who of the energy industry: Shell, ArcelorMittal, Engie and more besides.
While oil exploration in the Gulf of Mexico has been the big target of the Energy Reform overall, the role of natural gas as a transition fuel should make for strong growth. Prior to the Reform, Mexico saw its natural gas market rise at an average annual rate of around 3.5 percent.
Given its nationalized industry and the pressures on its national oil and gas company, Pemex, Mexico was unable to meet its own demand. This has led to a major reliance on imports from the U.S., resulting in a natural gas deficit worth an estimated $3.7 billion a year.
There are 17 pipelines currently pumping natural gas south of the Rio Grande and four more under construction. This is unlikely to be enough, given that Mexico’s natural gas demand is predicted to grow by 31 percent by 2029. This should provide more than enough spirited competition between international players to provide the country with a solid offering.
However, one specter looms large: dependency. With the North American Free Trade Agreement (NAFTA) currently being renegotiated after 23 years at the behest of the U.S. government, Mexico is worried. Its reliance on its neighbor to the north has long been a source of steady economic growth. But the thought of NAFTA, the central pillar of Mexico’s international trade, could be threatened has the government reconsidering its plans, even in the energy sector.
“There is a level of worry,” said Jonathan Pinzón, a partner at Zumma. “In government and industry circles, they are discussing alternatives, whether gas can be brought from other regions. It’s a very important discussion to keep having, now that trade between the two countries is being re-examined.”
As such, in the short-term, looking to capitalize on bringing more and more natural gas from the U.S. to Mexico can be a profitable gamble, albeit one which sees every auction become more competitive.
In the long-term, should trade in North America continue to wobble, the victors are likely to be those private partners that can diversify Mexico’s natural gas sources, including by helping the country drill locally. Those with a track record in Mexico’s booming extractive industries market stand to be in pole position.

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